Up more than 540% in just 3 months, can Lumen Technologies stock keep rising?

A stock that seemed dead in the water last year was Lumen Technologies (LIGHT -0.74%). The telco was heavily in debt, had suspended dividends, the financials looked dire, and the stock was in freefall. It seemed like an incredibly risky investment to own.

While these issues remain, as with everything these days, artificial intelligence (AI) and any related news can prove to be transformative for action — even a risky one. AI can open up new opportunities for a business and lead to greater sales and profit potential in the future. And news of some promising deals for Lumen on that front has really made the stock an incredibly hot buy this year.

However, with shares of Lumen up more than 540% in just the last three months, has the telecom stock risen too far too fast, or could it still be headed for even more growth in the coming months?

Deal with Microsoft lights a fire under the stock

What appears to have been Lumen’s turning point was the news that Microsoft would use Lumen fiber products as it expands its AI infrastructure. On August 5, Lumen announced a new AI-based order worth $5 billion (including the Microsoft deal) and that it is working on other opportunities that could total an additional $7 billion in sales.

As a result of the excitement surrounding this new potential in AI, Lumen shares have skyrocketed 540% in just three months. It’s now trading around multi-year highs, with shares not at these levels since 2022.

Are investors jumping the gun on Lumen?

AI can generate a lot of hype around a stock these days, and Lumen is proving to be no exception. But there are a few things investors need to remember.

The first is that while $5 billion is a significant amount of revenue (especially for a company that reported $14.6 billion in sales last year), what matters is what kind of margin Lumen will achieve. Over the past 12 months, Lumen reported a fairly light operating profit of $419 million, and that’s part of a worrying downward trend in the business. Investments in AI can be expensive — if margins aren’t strong from this new demand, it may not provide a significant boost to Lumen’s bottom line.

LUMN Operating Revenue (TTM) data by YCharts. TTM = last 12 months.

Another important thing to note is that while Lumen says it’s working on another $7 billion in deals, they haven’t closed. There will always be potential when it comes to AI, but whether this materializes into an actual order or agreement is another matter. Additionally, with a possible recession on the horizon and companies potentially more hesitant to spend aggressively on new investments, investors should not assume that Lumen sales will grow exponentially.

Should You Buy Lumen Technologies Stock Today?

If AI proves to be the growth catalyst many investors clearly hope it will be for Lumen, it’s certainly possible for the stock to rise higher, potentially to the levels it reached in 2022 (more than $10 per share ). But the danger is that investors shy away from this news of AI offerings and expect significant growth in the company’s near future.

It would be prudent to take a wait-and-see approach to determine if Lumen is indeed on the right track. This stock has burned investors badly in the past (it’s down 43% in five years, even with this recent rally), and before buying it, investors might want to see some evidence that the financials are moving in the right direction.

While plenty of upside could remain if you buy shares right now and things turn out well for Lumen, there’s also the risk that the valuation could tumble if reality doesn’t line up with expectations. Unless you have a high risk tolerance, you might be better off waiting on the sidelines with this stock.